VENUS DETECTIVE & SECURITY SERVICES PVT. LTD.,MUMBAI vs. I.T.O. WD2(3)(4), MUMBAI

The assessee is engaged in the business of providing security services and investigation services. Further, the assessee is also supplying cash van to Banks which is well equipped with security personnel and trained dogs to carry cash box from one place to another. The assessee filed its return of income for the year under consideration declaring a total income of Rs.7,07,070/-. The AO, however, completed the assessment by determining the total income at Rs.77,58,480/- by making various types of additions.

In the appellate proceedings, the appeal of the assessee was partly allowed by Ld CIT(A). Still aggrieved, the assessee has filed this appeal before us.

The first issue relate to disallowance made u/s 40A(3) of the Act. The AO noticed that the assessee claimed a sum of Rs.9,49,855/- under the head Advertisement Expenses, out of which a sum of Rs.6,02,096/- was found to have been paid in cash in excess of Rs.20,000/- in violation of section 40A(3) of the Act. Hence, the AO disallowed 20% of the payments made in cash in violation of sec. 40A(3) of the Act as provided in that section. The ld. CIT(A) also confirmed the same.

Before us, the ld.AR submitted that the assessee has passed a single entry in the books of account by combining expenses incurred through by several bills. He further submitted that the assessee has, sometimes, made payments on more than one occasion and the payment made in each occasion did not exceed Rs.20,000/-. He submitted that, in the following cases, such type of accumulation or payments have occurred. Date Amount in Rs. 30.9.2002 32,710 31.10.2002 25,460/- 31.12.2002 35,280/- 28.2.2003 28,920/- Accordingly, he submitted that the provisions of sec. 40A(3) shall not be applicable to the above said items. The remaining amounts disallowed u/s 40A(3) are given below Date Amount in Rs. 23.11.2002 1,08,120/- 29.11.2002 2,28,706 30.11.2002 27,220/- 31.1.2003 79,2000/- With regard to the above, the ld. AR submitted that the assessee has paid the above said amounts through an Advertisement Agent and he was required to make the payment in cash and hence, the said payments would be covered by exception given under Rule 6DD (l) of the Income Tax Rules, 1962 (the Rules).

On the contrary, the ld. DR submitted that the claim of the assessee with regard to the combining of the bills requires verification. With regard to the exemption claimed under Rule 6DD(l), the ld. DR submitted that the assessee has to prove that the Agent was required to pay the amount in cash.

We heard the rival contentions on this issue and perused the record. With regard to the claim of the assessee that several bills have been combined and single entry has been passed in the books of account, we accept the contentions of the ld. DR that the same requires verification at the end of the AO. Accordingly, we set aside the order of ld. CIT(A) in respect of the same and restore the same to the file of the AO with a direction to examine the claim of the assessee afresh.

With regard to the remaining payments, the assessee could not file any document before us to show that the concerned Advertisement Agent was required to make the payment by way of cash as provided under the provisions of Rule 6DD(l) of the Rules. In the absence of any supporting evidence, we do not find any merit in the submissions made by the ld. AR. Accordingly, we confirm the addition made in respect of the following items: Date Amount in Rs. 23.11.2002 1,08,120/- 29.11.2002 2,28,706 30.11.2002 27,220/- 31.1.2003 79,2000/-

The second issue relates to the disallowance of expenses claimed towards purchase of Diaries. The AO noticed that the assessee has incurred a sum of Rs.64,110/- towards purchase and distribution of diaries and the same was seen paid by way of cash. Before the AO, the assessee submitted the above said expenses were incurred by making several payments of less than Rs.20,000/- and hence, the provisions of section 40A(3) of the Act should not be applied. However, the assessee could not furnish original bills but could only furnish photocopy of the bills. With regard to the payment also, the assessee could not substantiate its explanation that the bill was settled on more than one occasion. Hence, the AO disallowed the above said amount of Rs.64,110/-. In the absence of the bills the same was confirmed by the ld. CIT(A).

We heard the parties on this issue. Since the assessee has produced photocopy copy of the bills and since the assessee could not furnish the details of payment made, we are of the view that the disallowance of entire amount of Rs.64,110/- is not justified. Accordingly, we set aside the order of ld.CIT(A) on this issue and direct the AO to restrict the disallowance to 25% of the Rs.64,110/-. We order accordingly.

The next issue relates to the disallowance of repairs and maintenance expenses of Rs.57,200/- by holding that the same is a capital expenditure.

The ld. AR submitted that the assessee had incurred the repairs and maintenance expenses towards repairing of flooring of the building and hence the same cannot be considered as capital expenditure. In this regard, he placed reliance on the decision rendered by the Hon’ble Bombay High Court in the case of CIT v. Hede Consultancy Pvt. Ltd. 258 ITR 380 (Bom).

We have heard the ld. DR on this issue. We agree with the contention of the ld.AR that the repairs of flooring shall not give rise to any capital expenditure. Accordingly, we set aside the order of ld.CIT(A) on this issue and direct the AO to allow repairs and maintenance of Rs.57,200/-.

The next issue relates to disallowance made out of security maintenance charges. The AO noticed that the assessee has incurred security maintenance charges to the tune of Rs.23,62,821/-, out of which a sum of Rs.4,15,448/- was paid by way of cash. Though the amount paid on each occasion did not exceed Rs.20,000/-, it was noticed that the expenses included payment made towards purchase of food and medicine for dogs, hospital and doctors bills etc. Since, the payment have been made by way of cash, the AO took the view that the genuineness of the expenses cannot be accepted and accordingly, disallowed the entire cash payment of Rs.4,15,448/-.

In the appellate proceedings, the ld.CIT(A) gave relief to the assessee to the extent of 50% and confirmed the disallowance of the balance amount.

The ld. AR submitted that the assessee had furnished full details before the ld.CIT(A) and hence the First Appellate Authority called for remand report from the AO. However, in the remand report, the AO could not effectively point out any mistake except making few certain observations about the small discrepancies in the cash payment. Accordingly, the ld.AR submitted that the ld.CIT(A) was not justified in confirming the disallowance to the extent of 50%. However, the Ld D.R fairly submitted that the department had preferred appeal against the relief granted by the Ld CIT(A), but the Tribunal, vide its order dated 2.4.2014 passed in has dismissed the appeal of the revenue.

On the contrary, the ld. DR submitted that all these expenses have been incurred by way of cash and hence they are not susceptible for verification.

Having heard the rival contention, we notice that the Tribunal has proceeded to dispose of the appeal of the revenue believing the submissions made by Ld D.R that there is not cross appeal filed by the assessee on the above said issue. The Tribunal has specifically noted the same in paragraph 13 of the order. Hence, we proceed to consider the claim of the assessee independently. We are of the view that the ld. CIT(A) was not justified in confirming the disallowance to the extent of 50% of the cash payment made by the assessee, since the assessee has furnished all the relevant bills and vouchers before the tax authorities and the AO also could not effectively point out any mistake therein. At the same time, we also find merit in the submissions of the ld. DR that the expenses incurred by way of cash are not amenable for verification. Accordingly, we are of the view that, in order to take care of deficiency, if any, some disallowance is called for. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to restrict the disallowance to 20% of the expenses incurred by way of cash.

The next issue relates to disallowance made out of salary/ emoluments expenses of Rs.8,09,233/-, out of total expenses of Rs.68,21,943/- claimed by the assessee. The AO noticed that a sum of Rs.6,86,550/- was paid by way of cash on 31.3.2003. Further, it was noticed that assessee has also made a provision of Rs.4,94,733/- towards salary. The AO further noticed that the assessee had started paying salary by way of cheque from the month of December, 2002. Hence, the AO asked the assessee to furnish the evidences in support of the payment of salary by way of cash. Since the assessee did not furnish any evidence, the AO disallowed the claim of Rs.6,85,550/- referred above. The AO also asked the assessee to furnish evidence in support of the provision of Rs.4,94,733/- made by the assessee towards salary expenses. Since the assessee failed to furnish the same, the AO disallowed 25% thereof. The ld. CIT(A) confirmed the same.

Before us, the ld. AR submitted that the assessee had furnished list of employees before the ld. CIT(A) and the same is placed at pages 186 to 191 of assessee’s paper book. He further submitted that the ratio of salary expenses to the gross receipts compared well with the ratio of the preceding and succeeding years. Accordingly, the ld.AR submitted that there is no reason to suspect the salary expenses claimed and accordingly prayed for deletion of disallowance.

On the contrary, the ld. DR submitted that the assessee has furnished only name of the employees and their identity and addresses were not provided. Further, it is on record that the assessee has started paying salary by way of cheque and hence the claim of payment of salary by way of cash on the last date of the accounting year has created doubt in the mind of the AO. Since the assessee has failed to substantiate the claim, the ld.DR submitted that the ld. CIT(A) was justified in confirming the disallowance.

We heard the parties on this issue. We have noticed that the AO disallowed the salary paid by way of cash and also disallowed 25% of the provision toward salary created by the assessee. We notice that the assessee has furnished the details relating to provisions made and the same is available at pages 189 to 191 of assessee’s paper book. Accordingly, we are of the view that the ld. CIT(A) was not justified in confirming the disallowance of 25% of the provisions made towards salary. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to allow the provisions in full.

With regard to the payment made by way of cash, we notice that the assessee has furnished names of the employees only, which includes “cash delivered to supervisors” to the extent of Rs.4,50,880/-. It is pertinent to note that the assessee did not furnish the details of the above said sum of Rs.4,50,880/-. At the same time, we are of the view that the disallowance of the entire amount of Rs.6,85,550/- is not justified since the assessee has furnished the names of the employees. Hence, we are of the view that the disallowance may be restricted to 50% of the claim of the assessee and in our view the same cover up the deficiency, if any, in the claim. Accordingly, we set aside the order of the ld. CIT(A) on this issue and direct the AO to restrict the disallowance to 50% of Rs.6,85,550/- referred above.

The next issue relates to disallowance of expenses which were outstanding at the year end. The AO noticed from the account of the assessee that following items of expenses were outstanding as on 31.3.2003

The next issue relates to the addition of Rs.3,00,000/- made as unexplained investments relating to the investments made in dogs. The AO noticed that the assessee was having a number of dogs, but did not properly disclose the cost of purchase of dogs in its books of account. The assessee submitted that it has received the dogs as gifts from animal lovers. Disbelieving the same, the assessing officer made an addition of Rs.24.00 lakhs. Before Ld CIT(A), the assessee furnished evidences and some of the persons also appeared before the AO in remand proceedings. Hence the Ld CIT(A), on a conspectus of the matter, confirmed addition to the extent of Rs.3.00 lakhs and deleted the balance amount of Rs.21.00 lakhs. It is pertinent to note that revenue’s appeal challenging the relief granted by the ld CIT(A) was dimissed by the Tribunal, vide its order dated 2-4-2014 passed in ITA No.4697/Mum/2012. In the said order, the Tribunal has observed that the Ld CIT(A) appears to have taken note of average price of Labrador dog by making certain market inquiries which is not found to be on a lower side. Even though the Ld A.R strongly contended that the addition of Rs.3.00 lakhs sustained by Ld CIT(A) was not warranted, we are of the view that the same is reasonable considering the deficiencies noticed by tax authorities and also on account of observations made by the co-ordinate bench. Accordingly, we confirm his order on this issue.

The next issue relates to the disallowance of expenditure of Rs.76,715/- incurred on purchase of Nokia handsets and Metal detectors treating them as capital expenditure. The Ld A.R submitted that the assessing officer may be directed to allow depreciation, if the order of Ld CIT(A) is confirmed. Since the nokia handsets and metal detectors are gadgets falling in the category of capital assets, we are of the view that the disallowance was justified. However, we find merit in the prayer for allowing depreciation. Accordingly, we direct the AO to allow depreciation on the above said assets.